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Forgery, Fishing and the Consumer Credit Act 1995

The Irish High Court recently considered whether a joint borrower should be required to repay a loan in circumstances where he had received the benefit of the loan but his signature on the underlying finance documentation appeared to have been forged. This briefing distils the judgment’s detailed discussion of forgery, its impact on mortgages over the family home and the potential for loan contracts to be rendered void by the Consumer Credit Act 1995.

Background

Bank of Ireland Mortgage Bank (the “Bank”) took enforcement proceedings against a Mr and Mrs Murray (the “Defendants”) for recovery of a debt owing under a loan agreement dated 2 May 2007 (“Loan Agreement”). While the Defendants did not deny that the loan had been advanced to, and used by, the Defendants, there was significant disagreement as to whether Mr Murray had actually signed the Loan Agreement or related finance documents and what this meant for the enforceability of the loan.

Did Mr Murray Actually Sign the Documents?

Mr Murray stated that he had not signed the Loan Agreement or any of the associated finance documents, including a charge over the Defendants’ family home (the “Charge”) and a declaration made for the purposes of family law legislation (the “Family Law Declaration”). While it is not unusual in enforcement cases for defendants to state that they had not signed documents, this assertion is generally unsubstantiated. In this case, however, Baker J found sufficient supporting evidence, highlighting a number of factors, including:

as a fisherman, Mr Murray was able to adduce evidence from fishing logs that showed that he was at sea on the date of certain of the signed documents;

Mr Murray had (as was common in the fishing village where he lived) handed over responsibility for all household affairs to his wife;

evidence from the solicitor and the commissioner for oaths, whose signatures witnessed execution of the documents by Mr Murray, was unconvincing. This was, in part, due to their lack of memory of ever dealing with Mr Murray and also the commissioner for oaths’ evidence that his practice was to sometimes sign attestations even when the signatory had not actually appeared before him; and

Mr Murray stated that his wife had told him that she forged his signatures on the documents.

Baker J held that “…as the evidence is to be tested on the balance of probabilities, and as the Bank witnesses have not persuaded me that the documents were executed by Mr Murray, and as, for the reasons explained, the attesting signatures are not a reliable indicator that the documents were duly authenticated or the affixing of the signatures witnessed, I conclude that the evidence of Mr Murray must be preferred”.

Family Law Declaration and the Charge

The consequence of Baker J preferring Mr Murray’s evidence was very significant for the Bank’s Charge. As Mr Murray was found not to have signed either the Charge itself or the related Family Law Declaration, the Charge was void (pursuant to the Family Home (Protection) Act 1976), rendering the Bank’s loan unsecured. Beyond the obvious economic risk that this created for the Bank’s ability to recover the debt, this finding also raised the question of whether the loan should be treated as a “housing loan” or a standard “credit agreement”, for the purposes of the Consumer Credit Act 1995 ( the “CCA 1995”). If the loan was not a housing loan, the credit agreement that it was advanced under could be found to be unenforceable for failure to meet the technical requirements of Part III of the CCA 1995.

Is the Loan Unenforceable?

After deciding that the Charge was void, Baker J then turned to consider whether the Bank’s claim for repayment of the debt was also unenforceable. Two principal lines of argument were considered by Baker J in this regard.

Enforceability – Unjust Enrichment

The fact that the Defendants had received and used money from the Bank was not in dispute. In determining whether or not Mr Murray should have to repay that money (advanced on foot of a loan agreement he did not sign), Baker J had to consider whether releasing Mr Murray from that obligation would constitute an unjust enrichment. Baker J, following an earlier Supreme Court decision, set out the pre-conditions that “…must be fulfilled by a plaintiff who claims for unjust enrichment:

(i) the enrichment of the defendant;

(ii) at the plaintiff’s expense;

(iii) in circumstances in which the law requires restitution (the “unjustness” of the enrichment); and

(iv) the absence of defences or other policies to deny restitution”.

Satisfaction of the first two pre-conditions was not controversial. The money had been paid by the Bank into the Defendants’ joint account and there was extensive evidence of the use of the money in that account for various purposes by the Defendants.

Baker J then considered two possible defences that Mr Murray might avail of. The first was whether he could show a “change of position” such that a form of estoppel might arise against the Bank. Baker J agreed with the view that this was really a test of causation. Mr Murray would need to show that he “…entered a transaction he would not have entered but for the enrichment, and that the balance of fairness means that the money is not to be restored”. Baker J was satisfied that, while some of the expenditure (including acquisition of land and refurbishment works) was exceptional, “…it would be unjust to deny the enrichment, and that the balance of fairness demands restitution”.

The second possible defence related to the question of whether Mr Murray could show that, while he had received the money, there was “no knowing receipt”. Without expressly determining the availability of this defence, Baker J found that, while Mr Murray may not have had detailed knowledge of the particular loan arrangement, he should have been broadly aware of the fact that money had been borrowed and was being used for the general purposes of the Defendants and their family.

Based on these findings in respect of the defences, Baker J decided that the third and fourth pre-conditions of the unjust enrichment test had been met and that Mr Murray had been unjustly enriched.

Enforceability – Consumer Credit Act 1995

The next question for consideration was whether, notwithstanding the unjust enrichment, the Bank’s action for recovery of the loan monies was barred as a result of the CCA 1995. This question arose because, in the view of the court, the loan could no longer be characterised as a “housing loan” for the purposes of the CCA 1995 as it was not, in fact, secured by the Charge. For loans to consumers that are not housing loans, the CCA 1995 imposes a number of technical documentary and conduct requirements which must be met at the time the loan is originated. If these requirements are not met, section 38 provides:

“A creditor shall not be entitled to enforce a credit agreement…against the consumer…unless the requirements specified in this Part have been complied with:

Provided that if a court is satisfied in any action that a failure to comply with any of the aforesaid requirements, other than section 30, was not deliberate and has not prejudiced the consumer, and that it would be just and equitable to dispense with the requirement, the court may, subject to any conditions that it sees fit to impose, decide that the agreement shall be enforceable”.

Enforceability – Judgment

Baker J found that, while the technical requirements of the CCA 1995 may not have been met in relation to the Loan Agreement, repayment of the loan provided under the Loan Agreement was still required. In coming to this conclusion, Baker J noted the following points with regard to section 38:

section 38 includes the proviso quoted above, allowing the court (where failure to meet the requirements was not deliberate and did not prejudice the consumer) to dispense with the requirements where the court considers it would be just and equitable to do so. In reaching this conclusion, Baker J dismissed the argument that the unenforceability contemplated by section 38 was being displaced by “back door provisions” relating to unjust enrichment, particularly given the express proviso set out in section 38 itself. Baker J did, however, “…agree with the general proposition that the doctrines of restitution may not be used as a means of enforcing an otherwise unlawful or unenforceable contract of loan”;

while the Bank’s claim for restitution of the amount of the loan advanced to the Defendants was allowed, the claim for accrued interest against Mr Murray was not allowed as Baker J was not satisfied that the Bank had established a basis for the claim or shown how the applicable interest rate could be assessed; and

on a technical point, the particular manner in which the loan had been provided by the Bank to the Defendants in this case could be characterised as a series of advances on the joint current account of the Defendants. This was important as, if it was not characterised as such, the court could not have relied on the proviso included in section 38 to excuse the Bank’s failure to comply with the requirements set out in section 30 of the CCA 1995 relating to the contents of the Loan Agreement.

This judgment provides a rare and interesting example of the court’s approach to the obligation of a consumer to repay a loan advanced to him/her under a contract that fails to comply with the technical requirements of the CCA 1995. The court’s approach focuses on reaching an equitable and just solution, taking into account the knowledge and conduct of both the lender and the borrower. While any future litigation on this theme will undoubtedly be significantly informed by this judgment, it is worth noting that the judgment does not fully elaborate on the analysis that supports the conclusions reached on the operation of the CCA 1995. There is, consequently, scope for a court in future litigation to explore and expand further on these themes, including with regard to the question of whether a “housing loan” should be re-characterised as a “credit agreement” (for the purposes of the CCA 1995), with the consequence of rendering it potentially unenforceable, in every circumstances where the underlying charge over the family home is found to be void.

For mortgage lenders, while the judgment underlines the serious risks that can arise from failure to maintain robust processes for legal documentation, it is also encouraging given that the court ultimately held that restitution of the loan money was required, even in the context of fraudulent and flawed finance documentation.